Rainmatter bulletin – Issue #1

July 5, 2021

Everything is fintech, and fintech is hot right now. According to CB Insights, Q1’21 was the best quarter on record for fintech, with $22.8 billion in funding. The same story is playing in India. According to Bain, fintech VC funding has grown from about $700 million in 2018 to $1.2 billion in 2020. Just halfway through this year, we’re probably on track to surpass that number by a wide margin, given that we’re minting fresh Indian fintech unicorns every week.

Since we partner with fintech startups as well, we decided it was a good idea to start writing about the developments in the space. While there’s a breathless analysis and reporting about fintech at large, we aren’t going to rehash that because that’s not our competency. We’ll write about the most interesting developments around the narrower niche of capital markets, which isn’t as sexy as payments and lending.

Apart from our longer-form pieces, we’ll publish regular blog posts on capital markets regulations, M&A, market structure and other important developments in capital markets. Since your inbox probably has 100s of unread newsletters, this will be blog-first, and here’s the first issue of the Rainmatter Bulletin.

If you still want an email with the updates.

BSE subsidiary BASL to supervise all RIAs

SEBI notified the first set of guidelines for Registered Investment Advisers (RIAs) in 2013. Since then, the advisory ecosystem in India has come a long way, largely on account of the SEBI’s persistent efforts to improve regulatory oversight. The regulator has issued four consultation papers over the year to improve the regulations. The last set of amendments came into effect in September 2020.

The amendments last year introduced significant changes to the RIA regulations. Perhaps the most significant change was the qualification & net worth requirements for RIAs.

In a recent development, SEBI has decided to delegate the supervision of all RIAs to the stock exchanges. BSE Administration & Supervision Limited (BASL), a wholly-owned subsidiary of Bombay Stock Exchange (BSE), was tasked with this by the SEBI in June 2021. BASL will now be responsible for overseeing and administering all registered investment advisers for the next 3 years.

What does this mean?

All RIAs now have to register with BASL first and then with SEBI.

Why this move?

The investment advisory ecosystem in India has gradually grown over the years. As of writing this post, there are 1318 registered RIAs in the country. However, a large number of these are stock & F&O tipsters peddling questionable ideas. There are very few traditional advisors.

Over the years, these tipsters have engaged in numerous dubious practices, leading to a series of enforcement actions by SEBI. For instance, SEBI in 2019 passed an order against a registered RIA for making a whopping Rs 52 crores through tips. A dedicated Self-regulatory organization like BASL could lead to much better supervision of RIAs, potentially improving upon the investment advisory ecosystem.

Revised sandbox guidelines

In May 2019, SEBI had issued a framework for an innovation sandbox. Under this framework, fintechs, even those not regulated by SEBI, could access datasets from the exchanges, depositories, and Registrar & Transfer Agents (RTAs), as long as they were working on “innovative products”. The idea was to allow such fintechs to test their products offline before launching them.

In June 2020, SEBI issued another framework for a regulatory sandbox specifically for regulated entities. This regulatory sandbox allowed SEBI regulated entities to test their products in a live environment on a limited set of clients.

The idea with both these frameworks was to encourage and support fintechs building products that push the regulatory envelope, so to speak, and may not fall under the ambit of the current set of regulations. However, there didn’t appear to be much activity under the sandbox frameworks, and a lot of ambiguities remained.

SEBI is now attempting to change this by issuing a revised framework for the regulatory sandbox, which clearly defines the eligibility criteria, evaluation process and a standard operating procedure for fintechs that apply to be part of the sandbox.

What does this mean?

This is a brilliant step that will help a lot of fintech startups that are building some really cool things which fall outside the realm of the current set of regulations.

Over the years, we’ve spoken to numerous startups that are working on ideas around fractional ownership of shares, social/copy trading platforms, fantasy stock market platforms, automated trading for retailers & investing solutions, securitized debt products, among others that aren’t fully covered by the current set of regulations. The sandbox framework will allow for regulatory exemptions and relaxations that allow for intensive product testing. Hopefully, this should reduce the regulatory risk for innovative new ideas.

Accredited investor framework

Accredited investors are sophisticated investors who have a deeper understanding of markets and a higher risk appetite than general investors. They have access to securities that are not available for the general public and also enjoy certain regulatory exemptions.

In order to be recognized as an accredited investor, you need to have attained a certain income or net worth threshold, and in countries like the US, you also need to have some certifications. The US had first introduced the concept of accredited investors in 1982. Other countries like Singapore, Canada and certain European countries currently recognize this class of investors.

In February 2021, SEBI had issued a consultation paper seeking comments to introduce a new framework for accredited investors in India. In a board meeting held on June 29th, SEBI approved a framework for accredited investors. A detailed circular will be issued soon, but here are some highlights from the press release:

The flexibility to invest lower amounts in AIFs and PMS than the regulatory minimums of Rs 1 crore and Rs 50 lakhs, respectively.
Regulatory relaxations for AIF schemes for accredited investors where each investor invests a minimum of Rs 70 crores. The relaxations apply to requirements such as portfolio diversification norms, scheme launch conditions and extension of scheme tenures.
Accredited investors with a minimum investment of Rs 10 crores in PMS schemes can invest in unlisted securities. They can also have bilaterally negotiated agreements with the PMS.
Accredited investors who use the services of an investment advisor (RIA) will have the flexibility to define the mode and limits of fee payments.
Subsidiaries of stock exchanges and depositories will be recognized as accreditation agencies. They will be tasked with certifying accredited investors.

What does this mean?

This is a great move that will lead to more innovation and deeper participation in our markets. This excerpt from a piece by Nishith Desai Associates sums it up best:

Alongside the direct benefits to the AI, the proposed AI framework will also ensure regulatory focus on less-informed investors, who are otherwise vulnerable to unfair practices such as mis-selling, and thereby requiring increased protection. Several industry experts have hailed the move by SEBI, having long argued against the ‘one-size fits all’ regulatory approach by SEBI and now exposing Indian markets to increased complex financial products, with the affirmation that only suitable investors would be allowed to participate in them. There are arguments against the AI Framework specifically in terms of the eligibility for AIs to the effect that net worth criteria cannot be a surrogate for financial acumen, noting that several high net worth individuals have crashed and burned while participating in complex securities.

Other important announcements

In the same meeting, SEBI also merged multiple debt regulations into a single regulation. It also made a few changes that are positive for fintechs and startups in general.

Entities less than three years old can now issue bonds through private placement.
The minimum issue size requirement of Rs 100 crore for a public issue of debt securities has been amended.

What does this mean?

With the 3-year requirement no longer applicable, some startups could potentially tap the bond markets to raise funds quickly. With the Rs 100 crore minimum limit for public issues of debt securities being done away with, startups working on unique fixed income products can potentially go for public issues.

Robinhood files to go public

Robinhood is finally preparing to go public and filed its S-1, giving an in-depth look into its business. Here are a few highlights:

$81 billion in assets under custody, of which $11.6 billion were crypto assets
17.7 million active users
18.0 million funded accounts as of March 2021 compared to 7.2 million in March 2020
Average Revenues Per User (ARPU) of $137
$959 million in revenue for the year ending December 2020, up from $278 million.
$522 million in revenue for the 3 years ending Mach 2021, up from $128 million
Net income of $7 million for the year ending December 2020 compared to a net loss of $107 million

On the Rainmatter Podcast

So far on the Rainmatter podcast:

Vishvajit, the founder of Quicko, in a freewheeling conversation about the Indian taxation system and the Quicko story
Prateek, the founder of LearnApp, on building LearnApp and the challenges of building an Ed-Tech platform focussed on financial education.